What you need to know about going from full-time renter to homeowner and the process in between.
Most people dream of having their own home at some point in their lives. What comes with that are the numerous financial bonuses of owning a home, including the ability to make a big investment and watching it rise over time.
Aperion Care released a study after surveying 2,000 millennials and found that 5 percent expect to have their own house at some point in their lifetime. As of the first quarter of 2018, homeownership rates nationwide were above 64 percent. The rates are slowly building their way up after the 50-year low it experienced in mid-2016.
Here are important facts that first-time homebuyers need to know, because it can appear to be an intimidating and daunting experience.
Are You Ready to Become a Homeowner?
The first step before looking at houses is ensuring good finances. Saving and making good financial decisions that are appealing to a lender can take more than a couple months, so make sure you plan in advance.
1. Credit History
Go on annualcreditreport.com and run a credit report on yourself. You'll be able to see the areas you can improve on. The longer the time since the last blemish on the credit report, the more likely a lender is to not think of it as a red flag and proceed with giving you a loan.
2. How much house can you afford?
Looking at savings that can be put towards a down payment and figuring out how much you can afford on a monthly basis is just as important as how good your finances look. Dabit recommends calculating your principal mortgage payment, interest, taxes and insurance to be 28 percent of your gross income.
3. Savings for down-the-road expenses
Maintenance and other costs associated with owning a home also need to be taken into consideration. Living in pricey markets, including D.C., usually mean that the costs are higher than 28 percent at the beginning.
4. Who to consult
After doing your part, you need to start talking to professionals who can help with the homebuying process. Starting with a real estate agent will typically lead to them helping you find a financial advisor, loan officer, real estate attorney, title insurance representative, home inspector, and others.
"The agent’s really the core source of all those, or at least can be,” says Josh Heyer, a licensed real estate salesperson with Triplemint, a full-service brokerage in New York City.
It is important that you are comfortable with and trust each person on your homebuying "team" because you will be working with them a lot and telling them important information.
What Mortgage Options Are Best for You?
There are a variety of lenders and products offered when it comes to finding a mortgage.
The key to finding the program for you is knowing how much you can initially put down for a down payment. Putting 20 percent of the home price down or paying for private mortgage insurance can qualify homebuyers for a conventional mortgage.
FHA loans, on the contrary, require less money down and a weaker credit history, but usually means higher interest rates. Veterans can use VA loans which require no money down but have other fees.
Interest rates can be fixed, usually in a 30-year, fixed-rate mortgage, or adjustable, called adjustable-rate mortgage, meaning it is fixed for a certain number of years before slowly changing to the industry rate.
Do not take the maximum approved number, as this may cause you to skimp on other needed expenses, such as food, for years.
How Can You Prepare to Look at Houses?
Many local real estate offices, banks, or community centers offer first-time homebuyer education courses, which could help you prepare for the process. Making a list of must-haves in your future home is also necessary.
Understand what you realistically are able to afford in a given area. Considering other neighborhoods or suburbs outside of major cities when on a tighter budget are always options to think about.
How Should You Begin Your Search?
House hunting online is always a good place to start, including on sites such as Zillow, Trulia, realtor.com, or Redfin. These allow you to choose areas you are interested in within the suburb or city.
Attempting to live in the hottest neighborhood could mean you're out of your price range. As Forrester notes, “No matter where you are, it’s location, location, location – anywhere in the world.”
Attending open houses on the weekend can help you expand your understanding of certain areas and see places that you originally did not think of. After this step, go to houses with your real estate agent. This way, you'll be able to see things that are on your must-have and want-to-have lists.
What Should You Include in the Offer?
After you've decided on a house to make an offer on, you must decide how much you want to offer, what your needs are, and what the seller wants. This may include a quick closing date, necessary repairs, or covering closing costs.
Your preapproval for a mortgage is important in creating a good offer, so make sure you have the preapproval letter from your lender.
Moving quickly is also important, especially in a popular area, as there will probably be multiple offers on the house. Due to this, don't be discouraged if you don't get the first house you bid on.
Sometimes, the winning bid isn't about price, the seller wants to be have a positive feeling about the deal at the end of the date. Including your preapproval letter in the beginning versus a competing buyer's prequalifications might be the route the seller chooses.
Next Steps Toward Owning a Home
After all of the negotiations have been finished, you will be given a few days to conduct your due diligence on the property. This includes the home inspection, which could change the amount you're willing to pay or if you want work done prior to moving in.
There will be repairs before long, but this is normal. This is why you want money saved after the down payment. There also will be funds for the closing costs, which is usually between 2-5 percent of the sale price.
Your mortgage lender will work on the underwriting for the loan based on other sales in the area. You may have to come up with cash if the appraiser determines the house isn't what it was sold for.
The last step is the closing, where the down payment is given to the seller, the mortgage is finalized, and you are officially a homeowner!
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